It seems that the accounting principle of fair-market accounting, a.k.a. mark-to-market accounting, is roundly criticised as the cause of the financial crisis. To the extent, as reported by Financial Times, IAS will have to hold an emergency meeting "to discuss certain topics made controversial by the credit crunch- including "fair value" and off-balance sheet accounting."
Further, it has just been reported the U.S. politicians are exerting pressure on SEC to suspend the accounting practice.
I think in times of desperation and in hope of finding a silver bullet, some of us may reach out and suggest or implement solutions that seemingly tackle the symptoms without necessarily finding the cure.
Accounting, in a nutshell, is just the presentation of the financial status of a company using a specific set of measuring rules. It does not change the underlying qualities of the assets and liabilities of the company. In other words, whether fair-market accounting is adopted or not, the quality of the subprime mortgage assets are unchanged. So, if we assume that the crisis is fundamentally due to the asset qualities at the financial institutions, we should deal with the cleaning out the houses and not just wiping the windows.
Besides, if one were to repeal the use of fair-market accounting, as I have previously written, we should also retroactively restate the previous financial years' financial statements in which excessive profits are recorded by adopting fair-market accounting. In that case, is there any way we can recoup the bonuses paid out to the Management for their 'good performances'?
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